The Difference between an Audit and Finance Committee, and Why You Need Both
For nonprofits, deciding on a board committee structure can be a challenge. Often, the decision is solely based on the number of board members and their talents and expertise.
However, proper financial oversight is essential to a nonprofit’s success. It ensures that the organization complies with applicable laws, acts with integrity, and is transparent with the public, stakeholders, and funders.
You are ahead of the game if you already have an Audit Committee. Many nonprofits rely on the Finance Committee if they even have one. An Executive Committee may also serve on it. The Committee that operates separately from the Finance Committee provides checks and balances in financial decision-making. In addition, it helps to minimize the organization’s fraud risk.
Read on to learn each committee’s specific roles and why having an Audit Committee and a Finance Committee is best practice for nonprofits.
The Audit Committee serves as the Board’s liaison with the external auditor. The Audit Committee selects the auditor and meets with the external audit partner and team pre-engagement. It is the first body to review the preliminary audit report and meet with the external audit team after completing the engagement. The Audit Committee brings audit concerns to the Executive Committee. Ultimately, it recommends acceptance and approval of the final audit report to the Board of Directors.
Monitoring the annual financial audit is just one type of risk assessment in which an Audit Committee may be concerned. The Audit Committee should also review other types of risk resulting from competition, revenue uncertainty, or data security. Also, they should look at developed risk mitigation strategies.
The Audit Committee provides the first level of review and approval of the organization’s Accounting Manual. They ensure that the organization and Finance Committee comply with the internal controls and policies in the Manual. The Audit Committee provides oversight of the Finance Committee to ensure that the Treasurer and Committee are exercising proper stewardship of the organization’s accounting and finance function.
Audit Committees ensure that all tax forms, including the IRS 990, state and federal employment taxes, property taxes, and unrelated business income tax are filed on time. They also can if they disseminate appropriately.
On an annual basis, the Audit Committee should:
- Engage the auditor and oversee the audit process
- Review recommended edits to and approve the Accounting Manual
- Meet with staff leadership to review organizational risk and mitigation strategies
- Meet quarterly with the Treasurer to review the activities of the Finance Committee
The first role of the Finance Committee is to review the organization’s financial statements regularly. This includes the Statement of Financial Position, the Statement of Activities (compared to the same period for the previous year and compared to the current year budget), and ideally, a Cash Flow Projection. The Treasurer should review financial statements monthly and the Finance Committee quarterly. The Treasurer should report any concerns regarding the organization’s financial health to the Executive Committee and Board of Directors.
The Finance Committee should also check if the organization is following the internal controls and policies outlined in the Accounting Manual. The Finance Committee should review the preliminary budget and present the final budget to the Board in advance of the beginning of the next fiscal year. If the organization faces financial challenges, the Finance Committee should work closely with staff leadership to evaluate various scenarios and courses of action and present viable options to the Executive Committee and/or Board of Directors.
During each fiscal year, the Finance Committees should:
- Regularly review financial statements
- Review annual budget preparation
- Ensure proper financial record-keeping
- Notify Board leadership of significant financial concerns
- Meet quarterly with the Audit Committee
Understandably, not all nonprofit boards have enough board members to support both an Audit and Finance Committee. In that situation, it may make sense for your Executive Committee to assume the responsibilities of the Audit Committee. For those nonprofits that can support both, these committees will act in tandem to ensure the financial stewardship, compliance, and transparency that stakeholders and funders desire.
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